A Big Step for Ford, a Small Step for Humankind?
The related issues of climate change and energy security have become a market force that is changing the operating environment in the automobile industry and putting business value at stake. — Ford Motor Company
With the December 2005 publication of the long-sought “Ford Report on the Business Impact of Climate Change,” at last the elephant in the room has been acknowledged by at least one of America’s ailing auto giants. Highlights of the Ford report include:
• the acknowledgement that policy uncertainty around climate change is not in the best interests of society or business,
• a commitment to participate fully in the “larger public dialogue” on actions needed to address climate change, and,
• a declaration that climate change “warrants precautionary, prudent and early actions” to enhance Ford’s competitiveness and protect profitability.
Disappointingly, Ford did not set reduction targets for its vehicle greenhouse gas emissions.
The result of years of shareholder resolutions led by the Tri-State Coalition for Corporate Responsibility and the State of Connecticut Treasurer’s Office (and co-filed by Trillium Asset Management, among many others), the Ford report broke new ground – for Ford or rival GM, that is. The end of low gasoline prices may have finally convinced Detroit that it’s time to end its obsessive love affair with SUVs.
Was too much time lost during this environmentally disastrous relationship? A 2003 study by the World Resources Institute and the Zurich investment group Sustainable Asset Management examined the impact, through 2015, of worldwide carbon constraints (geek-speak for policy measures mandating the reduction of greenhouse gas emissions) on prospects for ten auto producers in the U.S., Europe and Japan. Ford and GM ranked near the bottom of the companies compared, needing to invest in the neighborhood of $400 in additional costs per vehicle to keep up with climate mandates. (By comparison, Honda’s additional costs were estimated at $24.) The squeeze on pre-tax earnings was estimated at about 7% for GM and 10% for Ford. Adding insult to self-inflicted injury, some foreign competitors were expected to benefit from their early investments in fuel-efficient technologies.
When Merrill Lynch sought last summer to identify likely winners in what it calls the “Clean Car Revolution” – growing consumer demand for more economical and cleaner cars in a world of finite resources – Ford and GM didn’t make the cut.
That isn’t to say that Ford and GM have been doing nothing in this area – Ford aims to build 250,000 hybrids by 2010, while GM is banking on the future viability of fuel cell vehicles that would emit only steam – but there’s no disputing that both have been outclassed by rivals such as Toyota and Honda.
A Big Step for Ford, a Small Step for Humankind?
What is the significance of the Ford report? What’s next for Ford? Why hasn’t GM also acceded to shareholders’ request to produce a report on the business implications of climate change? We asked these questions and more of the leader of the GM and Ford shareholder teams that have been filing the proposals for almost a decade, Sr. Patricia Daly of the Sisters of St. Dominic of Caldwell, N.J.
What are the positives in this report?
This represents a high level of disclosure – more than we’ve ever seen in the auto industry. That, and the commitment from Ford to take the initiative in the policy arena.
Could that be a double-edged sword?
Absolutely. But they, and we as investors, have to understand the span of technology initiatives, policy options, where the marketplace could go, what will happen if fuel prices rise more, and they need to be prepared for a more flexible production cycle. By studying how climate change and other conditions are changing the marketplace, they will be ready to adapt to a range of possibilities.
What was said – or left unsaid – that disappointed you?
We still have not seen how Ford will respond if the Pavley Bill is enacted [California’s precedent-setting legislation to reduce global warming pollution from motor vehicles] or if other policy initiatives come into play. But I believe that Ford’s commitment to take the lead in the policy arena is the most critical piece of this report. This will be a tremendous contribution for the industry, and other related industries, as government and business finally anticipate the implications of global warming. There will be enormous benefits as the company goes through the process of looking at further disclosure, market conditions, and the impact on the auto industry – asking hundreds of their people to engage in this is critical not just for the auto industry but for all of business. It will catalyze a similar questioning process in the oil and gas industry, for example.
What do you make of the fact that Ford released its climate change report two weeks before releasing its new strategic plan? How do the two fit together?
The fact that the climate report was released separately signals to me that Ford sees these challenges as an overriding reality that needs to be understood and addressed to insure the future viability of the company. The reorganization positions them to get beyond the current critical state of the company and the U.S. industry. The climate change report speaks to the longer term.
Where will shareholders take this from here?
We’ll press for greater disclosure and continue to engage with company management on policy issues and new initiatives,
Although a climate report resolution at General Motors was withdrawn this year on a technical challenge, the company will still face pressure by the shareholders concerned about climate change. Catholic Healthcare West has filed a proposal that calls for the separation of the CEO and Chair positions.
That’s right. In contrast to Ford, we’ve received no signal that the GM board is as deeply involved in the climate change issue. CEOs need to acknowledge that shareholders bring resources to the table that are often missing from within a company. At many companies, there’s a positive dynamic and CEOs will express gratitude for our perspective and our work with management and boards. But at GM’s annual stockholder meeting last year, when a fellow shareholder called us eco-terrorists, CEO Rick Wagoner let that go unchallenged. That really diminishes our legitimate concerns and the credibility of our work and the work of many people within the company. Establishing a separate chair of the board is good governance, and a step that we believe would enable shareholder concerns to be more readily addressed.
Why has GM not produced this report?
GM believes that shareholders can get what they need in existing disclosures and did include additional information in their Sustainability Report. We believe that the process that Ford has used dealing with climate concerns, as well as supply chain, human rights and HIV/AIDS response, which engaged dozens of people on each issue is more productive than the current process at GM. The discipline of this report would necessarily engage a variety of people from various divisions of the company. We are concerned that they continue to believe that promoting the high emissions vehicles will get them out of financial trouble. I think we’re looking at a different world and the auto industry needs to be more flexible, and begin to think of itself as a transportation industry.